What Is the Debt-to-Assets Ratio?
Total-debt-to-total-assets is a leverage ratio that measures a company's total debt in relation to its total assets. Analysts can compare a company's leverage to that of other companies in the same industry using this indicator. This information might reveal a company's financial stability. The greater the ratio, the greater the degree of leverage (DoL) and, as a result, the greater the risk of investing in that company.
KEY TAKEAWAYS
- The total-debt-to-total-assets ratio indicates how much debt has been utilized to fund a company's assets.
- The computation takes into account all of the company's debt, not simply its payable loans and bonds, as well as all assets, including intangibles.
- When a company's total debt-to-total-assets ratio is 0.4, creditors finance 40% of the company's assets, while owners (shareholders) equity funds 60%.
The Total-Debt-to-Total-Assets Ratio: An Overview
The total-debt-to-total-assets ratio examines a company's balance sheet by taking into account all assets, both tangible and intangible, such as goodwill, as well as long-term and short-term debt (borrowings maturing within one year). It shows how much debt is used to carry a company's assets, as well as how those assets may be utilized to pay off debt. As a result, it assesses a company's leverage.
Debt servicing payments must be made under all circumstances, or the company will default on its debt covenants and face creditors forcing it into bankruptcy. Other liabilities, like as accounts payable and long-term leases, can be bargained to some extent, but debt covenants have very little “wiggle room.”
During a recession, a company with a high degree of leverage may find it more difficult to stay afloat than one with a low degree of leverage. It should be noted that the total debt figure excludes both short-term and long-term liabilities, such as accounts payable and capital leases and pension plan commitments.
What Does the Debt-to-Total-Assets Ratio Indicate?
Total-debt-to-total-assets is a ratio of a company's debt-financed assets to its total assets. This leverage ratio, when measured over a period of time, demonstrates how a corporation has expanded and acquired assets as a function of time.
The ratio is used by investors to determine whether a firm has enough cash to cover its present debt obligations and whether it can pay a return on its investment. Creditors use the ratio to determine how much debt the company now owes and if it can repay it. This will influence whether the company will be given additional loans.
A ratio greater than one indicates that debt is used to fund a significant share of the assets. In other words, the company's liabilities outnumber its assets. A high percentage also suggests that if interest rates rise quickly, a company may be at risk of defaulting on its loans.
A ratio below one, on the other hand, shows that equity funds a larger share of a company's assets.
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